Housing markets across the United States are on fire; skyrocketing values may be the death of the 20% down payment. Especially for first-time home buyers, the challenge of coming up with a 20% mortgage down payment can be nearly impossible, especially when continuing to save for other financial goals like retirement. Waiting for a larger down payment could mean missing out on their ideal home or what seems like an ever-increasing home price to base the 20% down payment against. Is the 20% down payment dead? Should you still try and put down 20%?

Most Home Buyers Put Down Less Than 20%  

Good friends just won a bidding war on their first home, paying roughly 33% above asking. Putting just 5% down allowed them to keep bidding on this home (in a hot real estate market). If you have the income, you still likely qualify for a mortgage with less than a 20% down payment. Smaller down payments will mean a larger mortgage payment and probably a higher interest rate. 

Without the help of home equity from a prior home, first-time homebuyers often struggle to come up with a sizeable down payment. As a financial planner, I am okay with not having a large down payment, as long as you have strong financial habits and can save towards a down payment. You want to avoid being house poor; if you have zero dollars saved for a down payment (and perhaps credit card debt), you are playing with fire buying a home. Let me tell you, as a long-time homeowner, something is constantly breaking or needing repair.

Waiting For 20% Down Could Mean Missing Out

While I have clients across the country, my financial planning firm- DRM Wealth Management- is based in Los Angeles and Palm Springs, meaning 20% down is a large number. Even for an entry-level single-family home in Los Angeles, we are often talking about a down payment of $200,000-400,000. This is a sizable about of money. With record-low interest rates and scarce houses for sale, I would hate to see people who have managed to save good amounts for new homes miss out because they didn’t quite have 20% down payments.

The flip side here is if you are in a cheaper housing market. If you can’t come up with the 20% on a $100,000 home, you should take a closer look at your finances before jumping into homeownership. Regardless of the cost of the house, you will likely need some cash reserves to qualify for a mortgage. Similarly, you don’t want to commit 100% of your saving to the down payment as you will most likely incur moving costs. Most people also have some overlap with renting and moving into their new homes. Don’t forget other costs of purchasing a home like inspections, appraisals, etc.

Typical Home Down Payments

Before making an offer on a home, speak with a lender to see how much mortgage you may qualify for. Also speak with your trusted financiial planner to figure out how much house you can actualy afford. If you are a salaried employee- you will likely be able to qualify for a mortgage much larger than you should take. For those who are business owners or self-employed, getting a large mortgage may be a bit more complicated. Your lender may have specific down-payment requirements to get the best term mortgage interest rate. Recently, a lender required a 30% down payment on a jumbo loan for a gorgeous house in Palm Springs a client of mine purchased.

For conventional loans, you can have a down payment as low as 3% as a qualified buyer. Many homebuyers still try to put down 20%, when possible. This can help you avoid higher interest rates and private mortgage insurance (PMI).

Federal Housing Administration (FHA) Loans are often a good solution for first-time buyers of relatively modest means. These home loans require a minimum of 3.5% down, with most homebuyers using these loans not putting down much more than that.

Homebuyers Near Retirement

For homebuyers nearing retirement, it may be tempting to make a giant down payment or pay cash for your new home. I would caution against this for a few reasons. First off, once you are retired, it will be much more difficult to get a new mortgage. Second, you can always throw money at the mortgage later, but it is costly and time-consuming to get money back out of your home equity. Third, while a smaller down payment will mean a larger mortgage payment, having the cash invested (rather than used as a down payment) will give you the most flexibility, financially, going forward. I would also caution again against getting a 15-year mortgage near retirement, as the higher mortgage payments may squeeze your budget or even cause you to pay more in taxes as you take a larger withdrawal from your retirement account to make the payments (pushing more income into higher tax brackets).

A 20% Down Payment Is a Good Thing

The reality is you can buy a home without a 20% down payment. If you are just rushing out to buy a house without the ability to save for a down payment, you are asking for trouble. (Remember how fun the financial crisis was for those who purchased homes without making a down payment?) For those with strong financial habits, stable incomes, and adequate savings, choosing not to put down 20% (or more) may sometimes be a wise choice.